Business Economics for Hoteliers

Embed Size (px)

Citation preview

  • 8/7/2019 Business Economics for Hoteliers

    1/61

    Business Economics

    For

    Hoteliers

  • 8/7/2019 Business Economics for Hoteliers

    2/61

    Contents:

    1. Business Economics and Hotel Industry.

    2. Economic systems.

    3. Utility and laws associated with it

    4. Demand and its measurement

    5. Elasticity of demand

    6. Elasticity of supply

    7. Factors of Production

    8. Cost Concepts.

    9. Revenue concepts

    10.Types of markets

    11.Price determination under Perfect Competition

    12.Price determination under Monopoly

    13.Price determination under Monopolistic Competition

    14.Money and its functions

    15.Taxation

    16.National Income

    17.Entrepreneurship

    18.Economic Growth.

  • 8/7/2019 Business Economics for Hoteliers

    3/61

    Chapter I

    Business Economics and Hotel Industry.

    1. In Hotel Industry various Economic concepts are used while

    taking different decisions. That is the reason why Business

    Economics has to be studied by the students of hotel management.

    2. Economic concepts used in hotel industry:

    Size of a hotel

    Location of a hotel

    Costs

    Profits

    Price

    Competition.

    Revenue

    MoneyTaxation

    National Income

    Economic Growth

    3. Remember that all hotel decisions are not economic decisions.

    For such decisions Business Economics does not offer any

    solutions.

    4. Whether Economics is art or science?

    For calling any branch of knowledge science to satisfy

    Two things:

    a. whether the study is being carried out systematically?

  • 8/7/2019 Business Economics for Hoteliers

    4/61

    b. Whether there are any laws studying cause and effect

    relationship in that study?

    5.Subdivisions of the study of Economics

    1.Consumption: concept of utility, law of diminishing

    marginal utility, equi marginal utility, consumers surplus,

    demand, its estimation, law of demand, elasticity of

    demand and its measurement.

    2. Production: factors of production, land, labour , capital

    and organization. Supply, law of supply and elasticity of

    supply.

    3. Distribution : Rewards to factors of production, rent,

    wages, interest and profit. National income and its

    measurement.

    4. Exchange: money and its functions, markets and their

    types, competition, monopoly, monopolistic competition,

    Oligopoly, duopoly etc. Price determination under theseconditions.

    5. Public Finance: Changed role of the Government from

    Police state to Welfare state. Government revenue,

    taxation, Government expenditure, Public debts, deficit

    financing.

    Development of economic thought:

    1. England: Trade and commerce. General

    understanding that Economics must be a study

    of trade and commerce. Popularly known as

    Mercantalism.

  • 8/7/2019 Business Economics for Hoteliers

    5/61

  • 8/7/2019 Business Economics for Hoteliers

    6/61

    should be increased. Pouring money in the

    economy by taking resort to deficit

    financing. Economics of development.

    7. Pigou: Introduced the concept of WelfareEconomics. Welfare should be the ultimate

    goal of the study of Economics.

    **********

  • 8/7/2019 Business Economics for Hoteliers

    7/61

    Chapter II

    Economic Systems

    Capitalism, Socialism and Mixed Economy

    Capitalism:

    Industrial revolution changed the whole complexion of the economies

    Large scale production became the order of the day.

    Separation of labour from capital.Few capitalists started owning all the means of production

    In small scale production it was not so. Capital and labour were in one and the same

    hand. But in large scale production this separation was inevitable.This gave rise to capitalism.

    The whole economic growth of the world owes its origin to this capitalistic system.

    Characteristics of Capitalism:

    1 Private ownership of economic resources.

    2 Freedom of contract.3 Free trade.

    4 Consumers choice preserved.

    5 Profit motive sole guiding principle.6 Price mechanism brings balance in production and consumption.

    7 Minimum Govt. interference. Govt. performs the functions of a police.

    8 Trade cycles.

    Merits of Capitalism:

    1. Automatic in nature2. Consumers freedom is preserved.

    3. Maximum utilisation of resources.

    4. Least Govt. interference.5. Profit is the motivating factor.

    Demerits of Capitalism

    1. Trade cycles

    2. Ill directed use of resources.

    3. Welfare of the community is sacrificed.4. Exploitation of labour.

    5. Division of the Society in haves and have nots. Class struggle.

    6. Seeds of its destruction are sown in its development itself.7. What we want is restricted capitalism.

  • 8/7/2019 Business Economics for Hoteliers

    8/61

    Socialism:

    Arose out of the problems associated with capitalism.

    Carl Marx was the founder of this principle.Soviet Russia and China are the best examples.

    Class struggle results in revolution and socialism is resorted to.

    Characteristics of Socialism:

    1. Means of production owned by the Government.

    2. To each according to his need and from each according to his capacity.3. No choice to the consumers.

    4. No private property.

    5. Perfect balance in production and consumption through economic planning.

    6. No trade cycles.7. Centralised planning.

    Merits of Socialism:

    1. Equality

    2. Planned economic activities3. No trade cycles

    4. Proper use of economic resources

    5. Welfare of the Society.6. No class struggle

    Demerits of Socialism:

    1. State capitalism

    2. Ill directed use of resources3. No choice for the consumers

    4. No motivation to work

    5. Undemocratic.

    Mixed Economy- the best way out:

    Both capitalism and Socialism were tried in different countries and it was observed that

    both have their own limitations. Both of them in pure form are not acceptable to the

    Society.

    Fear of trade cycle was very dominant in Capitalism. When the whole world was down

    with great depression in the year 1929 Soviet Russia was the only country which was

    enjoying economic stability.

  • 8/7/2019 Business Economics for Hoteliers

    9/61

    The existence of State capitalism resulted in poor motivation among the people so much

    that the level of production started dropping down. Hence there was no way left out butto dilute the system.

    In India, immediately after the attainment of freedom in the year 1947 it was decided totry Mixed Economy. This policy became still more clear when the country accepted a

    new industrial policy in the year 1948 which recognised two independent sectors public

    and private for the future economic development.

    Our then prime minister Shri Jawaharlal Nehrus trip to Soviet Russia proved to be a

    turning point for the economy. He saw the merits of planning as an effective tool for the

    economic development of the country. Shortly, Planning Commission was appointed inthe country to frame the five year plans for the country. and from 1951 India resorted to

    planning.

    The Government identified the activities which could be reserved for the Public sectorand the activities reserved for the Private sector. In case of some economic activities both

    the sectors were allowed to participate. Again in the year 1956 the Industrial policy wasfurther amended to bring the required clarity in the division of work in the two sectors.

    Characteristics of Mixed Economy:

    1. Division of economic activities in two sectors.

    2. Cetralised economic planning.

    3. Govt. interference in consumption, production, distribution and also in exchange.4. Consumers freedom was preserved.

    5. Equal opportunities of development to all.

    6. Balance between consumption and production. Hence no fear of trade cycles.7. Good motivation to private sector.

    Is the experiment of mixed economy successful in India?

    1. Inefficient Public Sector

    2. Red Tapism.

    3. Rampant Corruption.4. Poor control over the Private sector.

    5. Errors in planning.

    6. Wastages arising out of democracy.7. Not a single five year plan could be completed in time.

    **************

  • 8/7/2019 Business Economics for Hoteliers

    10/61

    Chapter III

    Utility and the laws associated with it

    1. Utility: want satisfying power.

    2. It is subjective term. Varies from man to man , place to place,

    and time to time.

    3. Types of utility: form utility, place utility, time utility and

    possession utility

    4. Utility cannot be measured. We do not have any mechanism

    to measure it.5. Total and marginal utility: With every additional unit

    consumed the total utility increases. Net addition to the total

    utility by adding every additional unit of consumption is

    termed as marginal utility.

    6. Law of diminishing marginal utility: The more one has, the

    less he wants.

    Hypothetical example:

    Oranges consumed Total utility Marginal utility1 100 units 100 units

    2 180 units 80 units

    3 240 units 60 units

    4 260 units 20 units

    5 260 units 0 units

    6 240 units (-) 20 units

    What do we understand from this?

    1. The more one has, the less one wants.2. Total utility increases up to a particular point and if the

    consumption is continued beyond a limit it decreases.

    3. When total utility reaches the maximum level marginal

    utility is zero.

  • 8/7/2019 Business Economics for Hoteliers

    11/61

    4. When total utility decreases, the marginal utility enters

    the negative zone.

    5. This law guides a consumer when he should stop the

    consumption.

    6. Critics say that this law is not applicable to money andother items of conspicuous consumption but if we

    examine the cases of these commodities carefully we

    find that they are also not an exception to this law.

    7. Law of Equi-marginal utility

    In the above example it is quite evident that the last orange

    consumed is giving (-) utility to the consumer. Thus instead

    of consuming the last orange if he consumes first banana thatwould give him more satisfaction. Here it is to his benefit

    that one commodity is substituted by another commodity.

    This substitution should continue till a point when the

    marginal utility derived from the consumption of orange

    equals to the marginal utility derived from the consumption

    of bananas. That is the reason why this law is known as the

    law of equi-marginal utility or law of substitution oer the law

    of maximum satisfaction.

    What is true in case of two commodities can be true in case

    many more commodities also. That is the reason why every

    person distributes his income on various commodities.

    8. Concept of consumers surplus:

    Alfred Marshall introduced this concept to the study of

    Economics. When a person consumes a thing he derivessatisfaction from it. At the same time he has to make a

    sacrifice also in the form of payment of price of the

    commodity. If the satisfaction derived is more than the

    sacrifice he should get a surplus satisfaction which Marshall

  • 8/7/2019 Business Economics for Hoteliers

    12/61

    terms as consumers surplus. When the sacrifice and the

    benefit are the same, the surplus would be zero.

    This concept of consumers surplus is very much useful to the

    business class, the finance minister and the consumerhimself. The businessman will extract higher price when he

    comes to know that the consumer is getting more satisfaction.

    The finance minister would collect more taxes and get a

    share from this surplus. The consumer also would decide his

    level of consumption considering the additional satisfaction

    he is getting.

    ***********

  • 8/7/2019 Business Economics for Hoteliers

    13/61

    Chapter IV

    Demand and its measurement

    1.Demand : wish- desire- want- demand- effective demand .

    Effective demand is that demand which is backed by purchasing

    power or money.

    It is this effective demand which provides a driving force to theeconomic activity.

    Effective demand

    Rise in income Rise in price

    Rise in employment Rise in supply

    Rise in production

    2. Factors on which demand depends:

    a. Priceb. Income

    c. Population

    d. Taste

    e. Traditions

    f. Advertisement

  • 8/7/2019 Business Economics for Hoteliers

    14/61

    g. Salesmanship

    h. Habits

    i. Expectations

    3. Methods adopted to estimate demand

    a. Gap between demand and supply.

    b. Contacting the persons who know.

    c. Experts in the field

    d. Journals, magazines and news papers.

    e. Product finders

    f. Demand surveys.

    g. Contacting the prospective purchasers.

    4. Law of demand

    a. It examines the relationship between price and demand.

    b. Law states that these two are inversely related.

    c. Increase in one is associated with decrease in another.

    d. Individual demand schedule.e. Market demand schedule.

    f. Why should demand increase with the fall in price?

    Existing purchaser will purchase more.

    New purchasers will register their demand.

    Same purchaser will purchase more units.

    New uses will be found out by the Society.

    g. Increase/decrease and expansion/contraction in demand.

    h. Exception to this law : Inferior goodsi. This law becomes applicable only if other things remain

    the same

  • 8/7/2019 Business Economics for Hoteliers

    15/61

    Chapter V

    Elasticity of demand

    1. What is elasticity of demand?

    a. The law of demand tells us whether there is a relationship

    between demand and price but it does not tell us the

    extent of relationship. That is what is answered by

    elasticity of demand.

    b. It measures the relationship between the proportionatechange in demand and the proportionate change in price.

    To put it in the form of a formula it can be shown as

    follows:

    Proportionate change in demand

    Elasticity= -----------------------------------------

    Proportionate change in price

    c. The formula can further be elaborated as follows:

    Change in demand

    Proportionate change in dem: = --------------------------

    Original demand

    Change in price

    Proportionate change In price =----------------------------Original price

    Change in demand Change in price

    E= ------------------------ (d) ----------------------

    Original demand Original price

  • 8/7/2019 Business Economics for Hoteliers

    16/61

    Change in demand Original Price

    E = ----------------------- x -------------------

    Original demand Change in price

    Example:

    Price Demand Price Demand

    10 500 5 1500

    1000 10

    E = ------- x ------

    500 5

    = 2 x 2 = 4

    d. Types of elasticity :

    a. Perfectly elastic

    b. More elastic

    c. Unity elastic

    d. Less elastic

    e. Perfectly inelastic

    Out of the five cases presented above cases nos. 1,3 and 5 are moreor less hypothetical or imaginary. They do not exist in reality. Thus

    only two cases are seen in vogue that more elastic and less elastic.

    Examples: More elastic: luxuries comforts, clothings etc.

    Less elastic: necessities, medicines , salt etc.

  • 8/7/2019 Business Economics for Hoteliers

    17/61

    Price, Income and cross elasticity

    1. Price elasticity:

    It measures impact of price on demand

    Price elasticity is negative

    Only in case of inferior goods it can be positive.

    Formula : Price elasticity = Proportionate change in demanddivided by proportionate change in price.

    Useful to hotel industry to finalise the tariff

    2. Income elasticity :

    It measures impact of income on demand.

    Income elasticity is positive

    Only in case of inferior goods it can be negative.Formula: Proportionate change in demand divided by proportionate change in

    income.

    If people shift to higher income groups, hotel industry is benefited.

    3. Cross elasticity:

    It measures the impact of price of one commodity on the demand for othercommodity.

    Formula: Proportionate change in the demand for A commodity divided by the

    proportionate change in the price of B Commodity

    If the two commodities are substitutes: example tea and coffee

    Price of tea Price of coffee Demand for coffee

    10 10 500

    15 10 800

    As the price of tea has gone up the demand for coffee also has gone up. This the

    cross elasticity here is positive.

    If the commodities are complimentary: example car and petrol

  • 8/7/2019 Business Economics for Hoteliers

    18/61

    Price of car Price of petrol Demand for petrol

    1,00,000 50 5000

    1,50,000 50 4000

    With the increase in the price of car, the demand for petrol has gone down

    Negative elasticity. in case of complimentary goods.

    Factors on which elasticity depends:

    a. Necessities

    b. Luxuries and status symbolsc. Substitutes

    d. Commodities having several uses.e. Possibility of postponement of demand

    f. Range of prices : too high or too low

    g. Proportion of income spent on a commodity

    h. Occasional purchasesi. First and subsequent purchases.

    Hotel industry and elasticity of demand:

    a. Five star hotels; inelastic demand

    b. Usual low budget hotels: elastic demandc. Factors which are inelastic demand:

    d. Economic growth: Vendor development, Sales promotion,

    Executive meetings, Market surveys. increase in the size of the markets,Industrial and trade fairs.

    e. Tourism: sight seeing, religious tourism, LTCS, conferences

    and seminars, cultural exchanges, medical tourism

  • 8/7/2019 Business Economics for Hoteliers

    19/61

    Chapter VI

    Elasticity of supply

    1. What is supply?:Making the goods available to the market with an intention to sale

    Difference between supply and stocks.

    Individual supply scheduleMarket supply schedule

    Increase/decrease and expansion /contraction in supply

    Joint and alternate supply

    2. Role of time in supply:

    Very short period: Supply cannot be increased at all. At the most conversion of

    stock in supply will help to increase the supply to small extent.

    Short period: Some increase is possible by using the idle capacity. But there arelimitations to maintain idle capacity. Hence only small increase is possible

    Long period: Increase in supply is possible by changing the capacity itselfExpansion programme can be taken up to increase the supply Sizable increase in

    supply is possible.

    Very long period: By changing the technology of the production itself. With thechange in technology tremendous increase in supply is possible

    3. Law of supply:

    Relation between the price and supply.

    It is a positive relationship between price and supply as per this law.Higher the price: more the supply and vice versa.

    Why should supply increase because of change in price?

    At lower price the existing buyer will purchase more units.

    At lower price some more buyers will join the list of purchasers.At lower price new uses of the commodity will be found out.

    If a supply curve is drawn, it will slope upwards.

    4. Elasticity of supply:

    Extent of response from supply to change in price.If the response is more we say that the supply is elastic.

    If the response is poor we call that the supply is less elastic.

  • 8/7/2019 Business Economics for Hoteliers

    20/61

    Examples:

    Price supply Price Supply

    10 500 15 2000

    In this example the price has changed from 10 to 15 but in response the supply

    has changed from 500 to 2000. This shows that the response from supply is muchmore than the change in price.

    Less elastic supply:

    Price Supply Price supply

    10 500 15 600

    Here we observe that the price has changed quite sizably but the response from

    the supply is very poor. Here we can say that the supply is less elastic.

    Formula to measure elasticity of supply:

    Proportionate change in supply

    E = --------------------------------------------

    Proportionate change in price

    Five types of elasticity of supply:

    1. Perfectly elastic supply: Infinite change in supply due to small change in

    price.

    2. Perfectly inelastic supply: No change in supply even

    when the price haschanged

    3. Unity elasticity : When the proportion of change in price and supply isthe same.

    4. Elasticity more than one: When the proportionate change in supply is

    more than the proportionate change in price

    5. Elasticity less than one: When the proportionate change in supply is less

    the proportionate change in price.

    Use of the concept of Elasticity of supply to hotel industry:

    Hotels are required to purchase food and beverage material and other materials as

    their day to day requirements. While making these purchases the concept of elasticity

    plays a major role.

  • 8/7/2019 Business Economics for Hoteliers

    21/61

  • 8/7/2019 Business Economics for Hoteliers

    22/61

    Chapter VII

    Factors of Production

    Four factors of production

    1. Factors which contribute to the production process are called as factors of

    production. They are Land, Labour, Capital and Organisation.

    2. In fact, there are innumerable factors of production. But broadly speaking,they can be grouped in these four major categories.

    3. Once upon a time there was only one factor of production which was

    recognised as a factor of production viz. Labour. Natural resources wereamply available and that is why it was not necessary to take their note.

    4. But later, with the increase in population, those resources which were

    assumed to be ample were found to be scarce. That is why, in course oftime another factor by name land was recognised as a factor of production.

    This term land included all the Natural Resources like soil, air, waterminerals and other gifts of Nature.

    5. With the advancement, industrial revolution took place where large scaleproduction became the order of the day. Large Scale Production was

    possible with the heavy investment of capital. As a result third factor of

    production was born by name Capital which included all the man madeimplements assisting the production process.

    6. Managing this big business gave birth to the fourth factor of production by

    name Organisation.7. Now it has become necessary to recognise all these four factors of

    productions they play equally important role in the production process.

    (A) Land as a Natural factor of production

    Land includes all the gifts of Nature like the land itself, water, air, forests, minerals etc.

    Following are the major characteristics of land:

    1. Land possesses indestructible powers.

    2. Nature is famous for its niggardliness.3. Self balancing system of Nature.

    4. Growing population is a constant threat to Nature.

    Extensive and Intensive methods of cultivation:

    1. Human beings settled firstly on the sea shores and the banks of rivers.

    That land was comparatively more fertile.2. As population grew, they had to bring the second grade lands also into

    cultivation.

    3. State by stage, the entire land was brought under cultivation. This systemof cultivation was known as extensive cultivation.

  • 8/7/2019 Business Economics for Hoteliers

    23/61

    4. But a stage came when the entire land was brought under cultivation there

    was no other go to cultivate the same land more intensively by spending

    more doses of the remaining three factors of production on the same pieceof land. This was inevitable as the demand for food grains could not be

    satisfied by the extensive use of land. This system of cultivation is known

    as intensive cultivation of land.

    Problems associated with the cultivation of land :

    1. Mechanisation of the cultivation practices.

    2. Subdivision and fragmentation of land in small pieces.

    3. Poor productivity of land.

    4. Contract farming.5. Cooperative farming.

    6. Suicides by farmers in recent years.

    7. Continuous degradation of land due to over use of fertilisers.

    8. Too much pressure of population on land9. Poor irrigation and economic use of water resources.

    (B) Labour as a factor of production

    Labour is a live factor of production. It possesses following characteristics:

    1. Labour and labourer are inseparable.

    2. There is a difference between labourer and slave

    3. Being a human factor, it needs a special consideration.4. Labour cannot be stored.

    5. Motivation plays important role in getting the work done.

    6. Bargaining power of labourers increases due to their organisations.

    Issues associated with Labour

    Efficiency of labour : Cheap labour is costly labour. Efficiency of labour depends upon

    different factors: such as: remuneration, education, training, environment, motivation,

    treatment, better tools, better service conditions, work culture, climatic conditions, etc.

    Division of Labour: Division of work in various parts and assigning each part to

    different worker . Thereby the efficiency increases and the output increases

    tremendously. This division can be in complete or incomplete parts. This concept wasvery popularly used by Adam Smith in Economics. There can be a geographical division

    of labour, each region specialising in different products

    Advantages : a). output increases. b) efficiency increases .c) right man for the right job.

    d) specialisation develops. e) departmentalisation possible.

  • 8/7/2019 Business Economics for Hoteliers

    24/61

    Disadvantages: a) monotony b) too much of specialisation is harmful. c) incomplete

    man. d) blockade anywhere results in problem everywhere.

    Mobility of labour: moving away from the native place for employment. Offers more

    rewards to the labourers. Mobility depends upon: a) Education b) means of

    transportation. c) attitude d) Political stability. e) Monetary rewards. f) family ties.

    Labour turnover: leaving one job and joining the other. May be better for the employee

    as he climbs the ladder but not good for the organisation as there is a huge wastage inrecruitment and training cost.

    (C) Capital as a factor of production:

    Capital is that part of wealth which is used for further creation of wealth. It naturally

    means that capital is wealth ant all wealth is not capital.

    Capital may assume very many forms. Sometimes it may be in the form of money.Sometimes in the form of equipment, material, land and building, stocks, debtors etc.

    Difference between fixed and working capital: Fixed capital may be in the form of land,

    building, machinery, equipment etc. Working capital may be in the form of material,

    work in progress, stocks, debtors etc.

    How is capital formed?

    Capital is created out of public savings.Income = Consumption + saving

    Saving depends upon power to save and will to save.

    Power to save depends upon income level.Will to save depends upon habits, desire to safeguard the future, political stability

    welfare schemes undertaken by the Government etc.

    Banking institutions mobilise the saving of the community.For better mobilisation bankers should reach the depositors.

    Investors approach the banks for loans.

    This borrowing gets converted into capital.

    Entrepreneurs are responsible for converting savings into capital.

    Why is capital formation poor in India?

    a.Illiteracy

    b. Poor banking habits.

    c.Poor branch expansion of banks.d. Poverty.- less power to save

    e.Poor development of entrepreneurship.

    f. Strong preference for gold.

    g. No encouragement from the Government.

  • 8/7/2019 Business Economics for Hoteliers

    25/61

    Role of foreign Capital

    a. Judicious use of foreign is always better.

    b. Terms and conditions of getting the loan should be very carefully examined before

    the loan is taken.c. Generally flag follows the foreign capital.

    d. Foreign loans come from individuals, institutions, governments or even foreign

    lending agencies like World Bank,. Asian development Bank etc.e. Foreign Governments lend huge funds to poor countries and later interfere in the

    political and economic decisions. The best example is that of United States Of

    America which is forcing its decisions on the Government of our country.

    (D) Organisation as a factor of production

    a. All the factors of production lie scattered here and there. Organiser brings them

    together and starts the production.b. Organiser and entrepreneur are one and the same.

    c. Organiser performs three primary functions; They are : Innovation, risk bearingand organising the productive activity.

    d. There are five different forms of organisation. They are:

    Sole trading concernPartnership

    Joint stock company

    Government organisationCooperative organisation.

    Sole Trading concern

    One man organisation

    Unlimited liability

    No perpetual existenceSuitable for small organisations.

    Suitable for gully hotels, road side hotels, dhabas etc.

    Partnership organisation:

    Two and more persons form and run the organisation.

    Generally friends or relatives form such organisation.Governed by partnership deed: constitution of the firm.

    Unlimited liability

    No perpetual existenceAmount of capital, profit sharing etc. stated in the deed.

    Besides normal partners, there are nominal partners and minor partners. etc.

    Liability of such partners may be limited.

    Suitable for medium size hotels.

  • 8/7/2019 Business Economics for Hoteliers

    26/61

    Joint stock companies:

    Share capital divided in small shares.

    Share money collected from innumerable shareholders.

    Registered under companies act.Two stages of registration: Certificate of incorporation and certificate of commencement

    Limited liability

    Perpetual existence.Ownership separated from management.

    Two constitutions of the company: Memorandum and articles of association.

    Two types of shares: Preference and equity.

    Two types of companies: Public limited company and private limited companyLiability of the directors can be made unlimited by provision in the constitution

    Finances can be raised through debentures..

    Shares of the companies are sold and purchased in stock exchanges.

    Suitable for big hotels.

    Government organisations:

    First three organisations are started with profit motive,

    This organisation is started with welfare motive.

    Promotion of tourism may be the objective of this organisation.Ashoka hotel in Delhi, ITDC and MTDC chains of hotels are the best examples.

    Cooperative organisation:

    Financially weaker individuals come together and form such organisation.

    Welfare motive.Perpetual existence

    Limited liability.

    Registration under Cooperative act.Minimum members required are 11.

    Successful experiments in cooperative housing. cooperative credit. etc.

    Generally cooperative canteens are managed by such organisations.

    Which of these forms is best suited for a hotel?

    No form is good and no form is bad. Different forms for different sizes of hotels.For a small roadside hotel: sole trading concern

    For a moderate size of hotel: partnership

    For big hotels: Joint stock companyFor promotion of tourism: Government organisation.

    For offices, schools, colleges etc.: Cooperative organisation.

    ******************

  • 8/7/2019 Business Economics for Hoteliers

    27/61

    Chapter VIII

    Cost concepts

    1.Importance of costing:

    Profit = Revenue - Cost.Price is decided by the market and not by us.

    Hence, for increasing the profits, the only way left, is to reduce cost.

    There are various coast centres in our organisation. such as purchase

    department, power department, man power department etc. Each of them is acost centre. All our efforts should be directed to economise the cost of

    production. For that we should be aware of various cost concepts. Main of

    them are studied as follows:

    2. Direct costs:

    Cost of material, labour and power.

    If different products are produced in one and the same establishment these

    costs can be directly identified to every product.Direct control of this cost is possible.

    For a hotel cost of food and beverages, labour etc can be called as direct costs.

    3. Indirect costs:

    These costs are called as overheads as they cannot be ascribed to anyparticular product. Office staff, general office expenses etc are such indirectcost.

    Difficult to control.

    These costs are debited to different products in different proportions.

    4. Out of pocket costs:

    These costs are actually incurred. There is an outflow of money. That is whythese costs are known as out of pocket costs.

    Wages paid to labourers, electricity bills, water bills, cost of food and

    beverages etc are the examples of out of pocket costs.

    5. Book costs:

    In such costs actual payments are not involved. It is merely by passing a book

    entry these costs are taken into account.

  • 8/7/2019 Business Economics for Hoteliers

    28/61

    Interest on capital, rent of premises payable to the owner himself, depreciation, etc are

    the examples of book costs.

    At the end of the year, it should be verified that no such costs are excluded.Indian farmers face such costs very often. Wages of family members, Use of bullocks for

    farm operations, seeds preserved to be sown next year involve some cost which is not

    taken into account by the farmers and therefore their cost calculations are incorrect

    6. Opportunity costs:

    Factors of production have alternate uses. If they are used for one particular

    purpose, they cannot be used elsewhere.

    Thus we lose some opportunity which has its own cost.This cost of loss of opportunity should also be taken into account while

    calculating the cost.

    Our hotel is booked by one party for three days for a marriage of his son. He

    wants that during this period we should give all the facilities exclusively tohim. We have 20 rooms in our hotel. Because of our contract with him we

    would not be in a position to let out these rooms. This is a loss of opportunityfor us. While giving him the quotation this cost of loss of opportunity should

    also be taken into account.

    A factory has two departments spinning and weaving. The spun yarn of the

    factory can be used in two ways: It can be sold in the open market or it can beused in our weaving department. If we use it in our weaving department we

    would lose the opportunity of selling it. Thus while calculating the cost of

    woven cloth this loss of opportunity should be taken into account.

    7. Fixed costs:

    For every economic activity some infrastructure is needed. For a hotel we may

    need land, building, interior decoration of rooms, kitchen equipment, furnitureetc. Expenditure for procuring these assents is called fixed cost.

    This cost, being fixed, does not change with the level of output. It means that even

    if the occupancy in the hotel changes, this cost is not going to change.

    Thus fixed cost in the short run remains unchanged.In the long run however, we may require bigger infra structure to satisfy the

    needs of increased occupancy. Thus in the long run this fixed cost will no more be

    fixed.

  • 8/7/2019 Business Economics for Hoteliers

    29/61

    Y

    Y

    8. Variable cost:

    Some costs however, will change with the level of output. These costs

    pertain to labour cost, material cost, power cost etc. which are bound toincrease with the increase in to output. Increased occupancy in the hotel will

    require more staff, more quantity of food and beverages, more expenditureon power etc. Thus variable costs increases as the output increases.It naturally means that if the output is zero, the variable cost would also be

    zero.

    If we want that the show must go on, at least the variable cost should berecovered from the revenue earned . It does not matter even if the fixed cost

    is not recovered because these costs would be there even if the production in

    stopped.

    9. Total costs:

    If the two costs shown above are added , we get the total cost. This can be shownwith the help of following formula:

    Total costs = Fixed costs plus Variable costs.

    If we want to show all these three costs with the help of diagram the fixed cost

    curve will be parallel to x axis. The variable cost will slope upwards , the curve

  • 8/7/2019 Business Economics for Hoteliers

    30/61

    passing through origin. The total cost curve will also slope upwards. Both total

    cost curve and the fixed cost curve will cut the Y axis at the same point.

    10. Average cost, average fixed and average variable costs:

    The formula shown above can be divided by N i.e the output produced.

    It will appear as follows:

    Total cost Fixed cost Variable cost------------ = ------------- - ---------------

    Output Output Output

    TC FC VC

    ---- = ---- + ---- i.e. AC = AFC + AVC

    N N N

    Example:

    Output FC VC TC AFC AVC AC MC

    1 10 5 15 10 5 15 15

    2 10 9 19 5 4.5 9.5 4

  • 8/7/2019 Business Economics for Hoteliers

    31/61

    3 10 12 22 3.3 4 7.3 3

    4 10 16 26 2.5 4 6.5 4

    5 10 21 31 2 4.2 6.2 56 10 28 38 1.7 4.7 6.4 7

    7 10 36 46 1.4 5.1 6.5 8

    8 10 48 58 1.3 6 7.3 129 10 62 72 1.1 6.9 8 14

    10 10 80 90 1 8 9 18

    From the above example following conclusions can be very well drawn:

    For different levels of output fixed cost is the same.Variable cost is continuously increasing

    Total cost is the total of FC and VC

    AFC falls very rapidly initially but later the fall is slow

    AVC is a U shaped curve: firstly falling and then risingAC is the total of AFC and AVC

    It falls down initially and then rising.It falls down due to large scale economies

    It rises because of large scale diseconomies.

    Marginal cast is initially falling down and then rising.

    When marginal cost is falling the average cost also is fallingl. Marginal cost curve cuts the average cost curve and moves above from the

    lowest point of the average cost curve.

    m. Marginal cost curve is not influenced by fixed cost. It is thevariable, cost which influences the marginal cost.

    11. Marginal cost:

    Marginal cost is the difference between two total costs.Marginal cost is the increase in the total cost when additional unit is brought into

    production It can be explained with the help of a

    formula:

    Marginal cost = ( TC) - ( TC)

    n n-1

  • 8/7/2019 Business Economics for Hoteliers

    32/61

    Y

    Y12. Avoidable and unavoidable costs:

    In the process of production and distribution ,if proper precaution is taken we may be

    successful in avoiding certain costs. Certain wastages are there which cannot be

    avoided as they are normal wastages. But if abnormal wastages are there efforts canbe made to avoid them. In printing business 8% wastage is supposed to be normal

    wastage . Any wastage above that is termed as avoidable wastage and by taking

    special efforts such wastages can be avoided.

    In some cases we feel as if we have avoided the wastage but if we carefully consider

    that cost recurs in another form. We can do away with the fleet of delivery vans amtheir maintenance is a very serious problem. But if we dispose them off we may be

    required to hire vehicles and thereby that cost will come up in another form.

  • 8/7/2019 Business Economics for Hoteliers

    33/61

    Chapter IX

    Revenue concepts

    1.What is revenue?

    Revenue is income generated out of business activities. That may be the sale proceeds of

    the goods produced and sold or the service charges for the services rendered.

    Entire revenue generated is not profit. From that revenue the cost of production has to be

    subtracted and the balance left is profit. If the revenue generated is less than the cost of

    production the businessman may even be required to face losses.

    1.What is break even point?

    Break even point is that minimum level of output where the costs are just covered by the

    revenue. That is the minimum level of output which should be targeted by every

    businessman.

    Any effort to produce more than the break even point will lead to profitability. Every

    businessman should try to be quite away fro the break even point as that will increase his

    safety margin.

    1.Total Revenue :

    Total sales proceeds received by the business is total revenue

    Total revenue = goods sold x price.

    When the sale is zero Total Revenue is also zero and as sales increase the total revenue

    would increase.

    Total revenue will increase up to a particular level of sale but once that level is crossed

    the total revenue is also likely to fall.

    Example:

    Price Sales Total Revenue1 10 10

    2 9 18

    3 8 244 7 28

  • 8/7/2019 Business Economics for Hoteliers

    34/61

    5 6 30

    6 5 30

    7 4 28

    In the above example, we find that as the price increases our sales will go down but the

    total revenue will increase upto a point but later it will also fall down.

    1.Average revenue

    If the total revenue is divided by the units sold we should get average revenue. That can

    be shown with the help of following formula:

    Total Revenue TR

    Average revenue = ------------------- i.e. AR = ------

    Units sold N

    For a firm under perfect competition, AR curve will be parallel to x axis

    Bit in other case AR curve will slope downward..

    1.Marginal revenue:

    Any increase in the Total revenue because of the sale of one additional unit will be

    termed as Marginal Revenue.

    Under perfect competition AR =MR and both will be represented by one and the same

    curve.

    under other conditions AR > MR

  • 8/7/2019 Business Economics for Hoteliers

    35/61

    Chapter X

    Types of Markets

    1.What is a market?

    Market is a place where the sellers and buyers interact with each other and sell andpurchase goods at the decided price.

    There can be specialised markets like vegetable market, grain market, cloth market, Sharemarket etc.

    The markets can be local, regional, National or even international. For some goods therecan be local market only (like bricks, sand etc) Some food grains are consumed only in

    some regions. For such products the market can be regional (like Jowar, Bajra etc) When

    the sale and purchase crosses national boundaries we call that market as internationalmarket.

    There can be a wholesale or retail market. In wholesale markets traders purchase goods

    for resale. In retail markets, however, the end purchasers i.e. the consumers whoultimately consume goods purchase their requirements.

    There can be spot market or even future market. When the possession of goods is givenby the seller to the purchaser immediately after the bargain strikes we call it a spot

    trading. But sometimes, the sellers undertake to supply goods to the purchasers at a fixed

    price for a definite future period we call it future trading.

    2, Different market situations :

    1. Perfect competition: Large no of buyers and sellers.2. Monopoly: One seller and large no of buyers

    3. Monopolistic competition: Sellers with different trade brands

    4. Oligopoly: Few sellers and large no of buyers.5. Duopoly: Two sellers and large no of buyers.

    6. Monopsony. One purchaser and large no of sellers.

  • 8/7/2019 Business Economics for Hoteliers

    36/61

    Chapter XI

    Price determination under Perfect Competition

    1.Characteristics of perfect competition:

    Large number of buyers and sellers

    Free entry and free exit

    Identical products.

    Many firms make one industry.

    Poor control over demand and supply

    Price taker and not a price maker

    Perfect knowledge of the market.

    No attachment between buyers and sellers.

    No transport cost.

    2, Is Perfect competition a myth?

    Considering the conditions stated above we cam conclude that perfect competition cannotexist in reality. It is that way a myth. In such a situation why should we study it? It works

    as a simple model of the market. Once we study it we can have deviations in the

    conditions and visualise what would be the situation in study it? It works as a

    3.Process of price determination:

    Interaction between the buyers and the sellers.

    If demand is greater than supply Price will rise

    If supply is greater than demand Price will fall down

    And ultimately it will settle down at that point which is acceptable to both parties.

    That is what is known as market price.

    Supply and demand curves will shift up and down as they depend upon other factors

  • 8/7/2019 Business Economics for Hoteliers

    37/61

    as well.

    Thus the price is likely to fluctuate depending upon the market conditions.

    4. Impact of the market price on different firms (short run)

    All the firms can be broadly divided in three categories.

    Those firms which earn abnormal profitsThose firms which face abnormal losses

    Those firms which will get only normal profits.

    Price for all these three types will be the same. Only differencewill be their cost structure.

    Should the firms facing losses stop their production?No - firstly because they expect better days ahead.Secondly if they are recovering variable costs completely.

    5. Position in the long run:

    Firms facing profits - will face tough competition and their abnormal profits

    will not continue

  • 8/7/2019 Business Economics for Hoteliers

    38/61

    Firms facing losses will try for cost cutting and recover from abnormal losses

    If not possible will withdraw themselves from production.

    Thus in the long run all will be getting only normal profits.In such a situation why should they continue their operations?

    Because somebody will disturb the equilibrium and again start getting abnormal

    profits in the situation.

    Y

    Y

    Firm Facing Losses

  • 8/7/2019 Business Economics for Hoteliers

    39/61

    Y

  • 8/7/2019 Business Economics for Hoteliers

    40/61

    Chapter XII

    Price determination under Monopoly

    1.Characteristics of Monopoly:

    One seller and large number of buyers.

    Firm and industry are one and the same.

    Price maker and not taker.

    Entry and exit made difficult.

    Perfect control over supply.

    Control over either price or supply.

    Price discrimination possible.

    2.Price determination in the short run:

    Firm and industry being the same, the demand curve will be sloping down ward for thefirm as well.

    Price will however be decided by the intersection of the demand and supply curve.

    Monopolist cannot control both the supply as well as price. He has to choose one ofthem. If he chooses to control the price, the market will decide how much to purchase and

    if he decides to regulate the supply the market will decide the price.

    This price determination under the condition of monopoly will be a matter of trial andmethod. The monopolist will try to maximise the profit at a particular level of output and

    stabilise there.

    Because the market situation is in his favour, he will draw abnormal profit in the shortrun. He may even face abnormal loss in the shot run due to maladjustments in the market.

    But such situation will not continue for a long period. as he will try his level best to

    return to a stage where he will gat abnormal profit.Can a monopoly price be less than competitive price? It can be if the monopolist is

    Government where the objective of the monopoly will be welfare of the Society. A

    monopolist who has started the activity with an intention to earn profit will see that hisprice will be more.

    1.Threats to monopoly:

  • 8/7/2019 Business Economics for Hoteliers

    41/61

    It would be a wrong conclusion if we say that monopolist always charges exorbitant

    prices That need not be so because he has to work under different pressures. such as:

    Potential competition.Agitation by consumers

    Price controls introduced by the Govt.

    Govt. entering the market as a competitorCompetition from foreign competitors.

    Social and political aspirations of the monopolist.

    2. Position of monopolist in the long run:

    Monopoly is recognised by the monopoly power the monopolist commands. If he can

    command that monopoly power in the long run also he will gat abnormal profits in thelong run as well.

    3. Price discrimination in monopoly:

    Monopolist is free to charge different prices to different customers. Such policy is known

    as price discrimination.This discrimination can assume different forms:

    Different prices for different regions i.e .regional discrimination.

    Different groups of customers: i.e. electricity bills charged by electricity boards to

    domestic consumers, farmers, industrial units, public utility services

    Different classes : i.e. first class, second class passengers. etc.

    Different seasons; Off season and seasonal variation s by hotels.

    Different quantities purchased : different levels of discounts to different customers

    purchasing different quantities.

    Dumping practices.: Selling at a very competitive rate to foreign markets and recovering

    the losses by charging high prices in domestic markets.

    Different timings; i.e. telephone department fixing the tariff schedule time wise such as

    morning tariff , day tariff, evening tariff and midnight tariff.

    Is discrimination possible?

    Yes For that two conditions are there.

    a .He should be successful in creating compartments of the markets

    b. Elasticity of demand in different markets should be different.

  • 8/7/2019 Business Economics for Hoteliers

    42/61

    Is price discrimination profitable?..

    If the monopolist is making use of his idle capacity in that case his profit margins willincrease because of discrimination. Best example is that of Air transportation companies.

    Their present policy of giving lavish concessions to passengers booking well in advance

    will definitely add to their revenue.

  • 8/7/2019 Business Economics for Hoteliers

    43/61

    Chapter XIII

    Price determination under Monopolistic competition

    1.What is monopolistic competition?

    Large number of buyers and sellers

    But not as large as in perfect competition.

    In one industry there are many firms.

    A seller may get a patent or copy right . That may give a feeling of monopoly.

    But the degree of monopoly power is so poor that the market share of each

    seller is not significant. There is a competition in different brands and that iswhy such condition is known as monopolistic competition.

    Entry and exit made somewhat difficult.

    Everybody has different products. similar products.

    2. Product differentiation:

    Different trade marks.

    Different sizes

    Different tastes, colours, smells, components. etc

    Different packings

    Different trade and selling conditions. such as credit, home delivery, gifts

    other services etc.

    Advertising and salesmanship

    Loyalty of customers.

    Psychological differentiation.

    3. Price determination:

    Market picture cannot be painted as market schedules cannot be prepared due tovariations in the products.

  • 8/7/2019 Business Economics for Hoteliers

    44/61

    Nobody dares to touch the price. Price reduction by one will result in price wars and

    everybody would be a loser in the price war. Increase in price by anybody will causeharm to him only as others would not increase their prices.

    1.What is the way out ?

    In such a situation what should be the way out:

    Non price competition. Price competition is immediately met with and therefore the

    sellers follow the technique of non price competition.

    Non price competition is not immediately noticed.

    Even if it is noticed copying is difficult.

    What are the techniques? - credit, home delivery, gifts, personal attention, durable

    goods, diaries, calendars, greetings, making the goods available during the periods of

    stringencies, friend, philosher and guide.

  • 8/7/2019 Business Economics for Hoteliers

    45/61

    Leadership:

    A shopkeeper having some control over the market share, having a dashing nature triesto gain leadership in the market. Others recognise him as the leader and follow his

    policies. When he increases the price others follow him. When he reduces the price others

    do the same without entering into price war. This leadership is informal.

    This leader may have many products out of which he develops one as a fighting brand .

    He is recognised in the market by that brand. Example: Hindustan lever and Lux toiletsoap. He tries his level best to see that nobody comes very closer to him as far as the

    fighting brand is concerned.

    Cost plus pricing:

    This has become the most popular technique of pricing. The producer calculates his cost

    of production and adds his normal profit to that and fixes the price. This pricing policy is

    so transparent that the costumer also likes it.

    1.Equilibrium of a firm:

    There can be three types of firms. a) firms getting abnormal profits in the short run b)

    firms facing short run abnormal losses in the short run and c) firms getting only normal

    profits.

    Firms getting abnormal profit in the short run may face tough competition and the

    abnormal profit may disappear in the long run.

    Firms facing abnormal losses may adopt remedial measures and cut the costs and survive.

    In the long run however, some firm may disturb the equilibrium by some innovation and

    again the short run adjustments would start.

  • 8/7/2019 Business Economics for Hoteliers

    46/61

    Chapter XIV

    Money and its functions

    1.When money was not there:

    In a primitive Society money was not in use because the volume of transactions was very

    small.

    But with the increase in transactions necessity of medium of exchange was very stronglyfelt.

    Initially people accepted the principle of barter where commodities were exchanged for

    commodities.

    Barter system worked quite well when the transactions were few in number. But astransactions multiplied various defects in the system were revealed. Main of them were:

    2.Difficulties faced in barter system

    Problem of double coincidence.

    Problem of medium of exchange

    Problem of measure of value

    Problem of store of value

    Problem of deferred payments.

    As a result, something as a measuring rod was necessarily found out That measuring rod

    passed through various evolutionary stages

    1.Evolution of Money

    Money passed through different evolutionary states:

    2. Commodity money: like goats, food grains, courie

    3. leather money: leather pieces

    4. Metal money: mainly gold and silver

  • 8/7/2019 Business Economics for Hoteliers

    47/61

    5. Paper money: Representative paper money

    6. Paper money: inconvertible paper currency

    7. Credit money: cheques, bills of exchange , credit cards. etc

    2.Functions of money:

    One unknown poet has presented one stanza to show the functions of many which read as

    follows:

    Money is a matter of functions four,

    Medium, measure, standard and store.

    Medium of exchange:

    Introduction of money solved the problem of double coincidence. Now we are not in

    search of a person who is ready to purchase our commodity in exchange of a commoditywhich we want. Because of the solution of the problem of double coincidence four

    transactions which were mixed up got separated. Because of this separation, markets are

    easily formed.

    Measure of value:

    We have many measuring rods in the community. For measuring liquids we have ameasure of litre, for measuring solids we have a measure of kilogram, for measuring

    distance we have a meter. Similarly for measuring value we have a measuring rod known

    as money. It measures everything, may be litres, kilograms, meters or anything.

    Standard of deferred payments:

    On many occasions, we are required to defer payments to some future dates. This

    happens mostly in borrowing and lending transactions. If a commodity is borrowed while

    returning the same problems related to size, colour, quality, taste, etc are likely to arise.

    But that problem is nomore there . If one borrows Rs.1000 now he would refund rs.1000later.

    Store of Value:

    Instead of consuming a thing now we may decide to consume it in future. But

    unfortunately commodities are perishable. Besides, if we save wheat we may be requiredto consume wheat only in the future. But money has solved this problem also. We can

    store money and use it later for any purpose we want. Arising out of this function of

    money the entire banking system has come into being where people go and save money

    for future.

  • 8/7/2019 Business Economics for Hoteliers

    48/61

    a. Money can be used as a tool for Economic development:

    Now a days money can be used as a tool for economic development.

    Following are the ways to use it for economic development.:

    Capital formation has become possible due to the use of money.

    Deficit financing has become possible.

    Redistribution of income has become possible by using taxation system.

    Balanced development has become possible.

    Development of markets has become possible.

    2.Value of money:

    Money does not have intrinsic value.

    It has value in exchange.

    Value of money and quantity of money are inversely related

    In inflation the value of money fall down.

    Value of money can be measured with the help of index numbers.

    When the index number rises it means that the value of money has gone down and

    vice versa.

    Measurement of absolute value of money is not possible. Index numbers help us

    measuring relative value of money.

  • 8/7/2019 Business Economics for Hoteliers

    49/61

    Chapter XV

    Taxation : A Major tool of Public finance

    1.Government as a welfare state:

    Once upon a time Government was merely a police state. It was performing only two

    functions viz: Protecting the people from foreign aggression and maintenance of law and

    order in the country.

    But now the concept of governance has changed very fast. Now government is a major

    player in the economic activity. It has an active role to play in all the four subdivisions of

    Economics. i.e. consumption, production, distribution and exchange. The main objective

    of most of the governments is welfare. Objective of our government:

    Bahujan Hitaya ; Bahujan Sukhay

    Naturally all the activities need finances. Therefore a separate subdivision has come

    forth in Economics known as Public Finance dealing with revenue of the government,

    public expenditure, public debt and finance management by the government.

    2.Public Revenue:

    Public revenue is the income of the Government from various sources. In good old days

    the policy of the Governments was to collect revenue as less as possible because

    governments used to spend money lavishly for unproductive purposes. But the moderngovernments being welfare states need financial resources to carry out government

    works for the welfare of the Society.

    Governments collect money from following sources:

    Taxation: Major source nearly 80% money is raised through this source.

    Income of the public undertakings: Now a days this source also contributes significantly

    as many public utility services are run by the government.

    Other misc. receipts in the form of fees etc.

    3.Taxation Major fund raiser:

    Governments are interested in collecting as much fund as possible from the taxation

    system. That is why every government plans a multiple tax system where it really

    becomes difficult for every person to avoid the taxes. For example:

  • 8/7/2019 Business Economics for Hoteliers

    50/61

    if he earns income, there is a income tax

    if he spends money, there is expenditure tax.

    if he donates money, there is a gift tax.if he invests money, there is a tax on profit he earns.

    if he acquires property, he has to pay wealth tax

    if he dies because of pressure of tax, there is a death duty.

    4. Canons of taxation:

    Most of the Governments are democratic in nature and that is why while levying the

    taxes they have to see that the tax payers are not unnecessarily punished. They have to

    follow certain principles of taxation which are[popularly known as canons of taxation.

    Major of them are:

    Canon of simplicity

    Canon of economy

    Canon of productivity

    Canon of elasticity

    Canon of equality.

    Canon of multiplicity.

    Canon of certainty

    Canon of convenience.

    5.Direct and indirect taxes

    In every tax, we should find out who pays the tax and who bears the burden of the taxes.

    If the impact of tax and the burden of tax is shared by one and the same person we call it

    as direct tax. The best example is that of income tax. A particular person pays the income

    tax. The burden of that tax is borne by the same person . That is why we call income taxas a direct tax.

    But that is not the case with the sales tax. Sales tax is paid by the seller to theGovernment. But ultimately, he shifts it to the customer who purchases the goods. It

    means that the impact falls on the seller but the incidence falls on the purchaser. That is

    why such taxes are known as indirect taxes.

    Five examples of direct taxes:

    Income tax

  • 8/7/2019 Business Economics for Hoteliers

    51/61

    Property tax

    Wealth tax

    Road tax for vehicles.

    Fair tax

    Five examples of Indirect taxes

    Sales tax

    Entertainment tax

    Vat tax

    Service tax

    6.Merits of direct taxes:

    Certainty in payment.

    Economy in collection

    Very productive

    Flexible

    Equality

    7. Demerits of direct taxes:

    Most inconvenient.

    Complicated..Tax on honesty.

    Possibility of heavy corruption in collection of tax.

    8. Merits of indirect taxes:

    Most convenient

    Simple

  • 8/7/2019 Business Economics for Hoteliers

    52/61

    productive

    flexible

    9. Demerits of indirect taxes:

    Heavy cost of collection

    Uncertain

    Possibility of evasion

    degressive in nature

    less productive.

  • 8/7/2019 Business Economics for Hoteliers

    53/61

    Chapter XVI

    National Income and its measurement

    1. Circular flow of Economic activities:

    Factor Market

    Factors and Producers

    consumers

    Product market

    Inner circle: There is a factor flow from factor to the producer In return, there is a factorremuneration

    Outer circle: The consumers make the payment for purchase of goods and in return they

    get the goods from the producers.

    1.What is national income?

    Money vale of all the goods and services produced in the country during the period of

    one year. + Net result of the transactions with the rest of the world

    2.What for national income is measured?

    To measure the economic welfare of the country.To know the standard of living of the country.

    To assess the rate of economic growth of the country.To diagnose the economic ills and imbalances.

    To forecast the future economic growth of the country.Per capita income is supposed to be the indicator of economic growth of the country.

    1. Methods of measurement of national income:

  • 8/7/2019 Business Economics for Hoteliers

    54/61

    Output approach:

    a. Census of production to know the gross value of the final

    goods and services produced in different economic sectors.

    b. Add export surplusc. Add net income from abroad

    d. subtract depreciation

    e. Add subsidiesf. Subtract indirect taxes

    g. Avoid double counting.

    Income approach :

    a. Income of all the factors of production like rent + wages + interest +

    profits.

    b.This method is also known as factor cost method because rewards to

    actors is the base of this method.

    How to compute?

    Total personal incomesAdd net income from abroad

    Add Undistributed profits of the firms and companies

    Add direct taxes on the companyIncome from Govt properties.

    Subtract transfer payments

    Subtract depreciation

    Expenditure approach:

    Expenses incurred by individuals, firms an Governments.

    Add subsidies

    Add exports

    Subtract importsSubtract depreciation

    Which of these methods is best?

    Output and income methods are widely usedIn UK and USA income method is popular

    In our country, mixture of income and output methods.

    Expenditure method is very rarely used.

    In India output method for industry and agriculture and

  • 8/7/2019 Business Economics for Hoteliers

    55/61

    income method for trade, commerce, banking and transport

    Only in exceptional cases expenditure method is used.

    Measurement of National income in India:

    a. Even in pre independence era the estimation of

    National income was done

    b. Dadabhai Naoroji did it for the first time in India in theyear 1867-68

    c. In 1949 the National income committee was appointed

    under the chairmanship of Shri P.C.Mahalanobis. Other members

    were Dr. D.R.Gadgiland Dr.V.K.R.V.Raod. On the recommendations the NIC Government

    established the National Sample Survey (NSS)

    e. From 1967 onwards the Central Statistical Organisation

    has designed the perfect system of measurementf. Output method for agriculture and manufacturing

    sectors and income method for service sector.

  • 8/7/2019 Business Economics for Hoteliers

    56/61

    Chapter XVII

    Promotion of entrepreneurship

    Who is an entrepreneur?

    1. He is an instrument of change.

    2. Innovation is his primary job.

    3. He introduces purposeful change.

    4. Directions of change:

    Altogether a new product or service.

    Durable product.New taste, new shape, new colour, new size, new packing, new components.

    New market.New channel of distribution.

    New use.

    Product substitution.

    Import substitution.New campaign.

    5. Basic functions of entrepreneur:

    Innovation

    Risk bearing

    Organisation.

    6. Entrepreneurship In India:

    Entrepreneurship before MoghulsEntrepreneurship during Moghul rule

    Entrepreneurship during British regime: Too much of exploitation.

    Managing Agency system: great threat to entrepreneurship in India.

    Independence and after.

    7. Efforts by the Govt to promote entrepreneurship:

    Training.Readymade industrial plots.

    Readymade sheds

    Readymade infrastructure.Subsidies to undeveloped areas.

    Creation of financial institutions for provision of fixed capital

    Working capital through banks

    Marketing facilities.

  • 8/7/2019 Business Economics for Hoteliers

    57/61

  • 8/7/2019 Business Economics for Hoteliers

    58/61

    Chapter XVIII

    Economic Growth

    1. Two types of growth:

    Natural growth

    Planned growth.

    2. Stages of Economic development:

    Too much of dependence on agriculture- Poorly developed countries.More dependence on industries: Developing countries.

    More dependence on service industries: Developed countries.

    3. Factors impeding Economic growth:

    Economic factors: Poor resources

    Population explosion.Economic systems

    Poor entrepreneurship

    Infra structural facilities.Banking habits.

    Economic stability

    Political factors: Political will.Political stability

    Social factors: Social systems- Joint family system. Caste system

    Religious attitude

    Mind set traditional attitude

    Social infrastructure.Education.

    Materialist attitude.

    a. How to speed up the economic growth?

    i. Economic planning.

    ii. Development of infra structural facilities.iii. Mobilisation of saving.

    iv. Development of entrepreneurship.

    v. Political support.vi. Balanced regional growth.

    vii. Subsidies and tax concessions.

    viii. Export promotion.

  • 8/7/2019 Business Economics for Hoteliers

    59/61

    Question Bank for II Students

    1. Compare and contrast between Capitalism and Socialism andshow how Mixed Economy reaps the benefits of both of these

    systems.

    2. You propose to start a five star hotel at Aurangabad. How will

    you estimate the demand for such a hotel?

    3. Examine the concept of elasticity of demand. Show its various

    types. Shoe how this concept is useful in finalizing the tariff of ahotel.

    4. Differentiate between stocks and supply. Examine the role of

    time in increasing the supply.

    5. Examine the different cost concepts. Show how they are useful

    in taking hotel decisions.

    6. Examine the utility of the concept of perfect competition even

    when it is a hypothetical situation. How are prices determined

    under this condition?

    7. Elaborate the concept of price discrimination. How is it

    practiced? Is price discrimination profitable?

    8. Show how product differentiation is practiced under the

    conditions of Monopolistic Competition. Why is non pricecompetition preferred to price competition?

    9. Point out the difference between direct and indirect taxes by

    giving five different examples of each of them. Which of these two

    systems better?

  • 8/7/2019 Business Economics for Hoteliers

    60/61

    10.Money is a matter of functions four,

    Medium, measure, standard and store. Examine this statement in

    the light of functions of money.

    11. Discuss the role of National income statistics in framing the

    National policies. How can it be measured?

    12. Discuss the bottlenecks in enhancing the rate of economic

    growth. How can these hurdles be removed?

    13. State the various forms of organization. Which of them is best

    suited to the hotel industry?

    14. Point out the merits and demerits of division of labour. In spite

    of the demerits, show why it should be practiced.

    15. Examine the role of capital in speedy economic growth of the

    country. How is it mobilized? Discuss the various measures

    implemented by the Govt. to promote capital formation.

  • 8/7/2019 Business Economics for Hoteliers

    61/61